HOMEX FOR GROWING MEXICO

In every market correction, crash or significant downturn, there is at least one spectacular collapse. In this one, we have had many, from the bankruptcy of Lehman Brothers to near demise of AIG, Mae (Fannie) and the Mac (Freddie ). In Canada, one of the most significant event was the sale of AIC; a mutual fund company known for its buy, hold and prosper strategy. Other than Warren Buffet, you will be hard pressed to find a manager associating himself with buy and hold strategy these days. And even the Oracle(of Omaha) has been known to do lot more than simply buy and hold stocks; he has dabbled in silver, futures and quite a bit of trading. Is this strategy really dead or have most interpreted it wrong?

For AIC, buy hold and prosper was a great marketing strategy, not to be taken or followed literally. Investment strategy should be commensurate with asset type, region, markets and sectors. Buying and holding anything in the pulp and paper sector would surely have sent you to a poorhouse. In fact, virtually anything other than cash and bonds in the U.S. failed. Not so if you happen to be in markets like China, India or even Mexico. For these are the markets where demand has been growing steadily over the last couple of decades, placing them significantly higher than a decade ago numbers,, even after a similar or an even more pronounced trouncing they got last year. It is growth that is the key missing ingredient if you practice buy and hold here in the developed market. In other words, a buy and hold strategy is highly dependent upon the momentum in the stock market and the economy. If you hold on to an asset no matter where, that is growing steadily, producing positive earnings, the strategy works beautifully.

So, when last year a friend told me that he had bought a house on the beach in Mexico for under $50 K long before the market blew up in California where an average house went for over a million, I wanted to know who is doing this. First of all, Mexico does fit with the scenario I just described, a region where demand is likely to persist for generations not just years or decades. And practicing buy and hold in such a region should pay off and in fact has. To get in, You could go buy the country index ETF (exchange traded fund) but you have to be careful as impact of US juggernauts has made most indices in the world US like. That is one reason most markets are correlated, i.e. they go up and down at the same time. There has not been a place to hide in this mayhem. So a simple “buy the country and hold” may not be as effective as picking sectors or stocks in a growing region.

One sector that used to be a barometer of market and economy here in Canada and U.S., is real estate and construction. Unfortunately it truly has become a has been sector now; if you think the average price of a Vancouver house will continue to rise at double digit rate from the current base of over $800,000, you obviously haven’t learnt much. My thesis is to look for housing stocks in countries like India, China and Mexico. I haven’t found many Chinese construction stocks yet, but a company I have written about a few times here, Homex Development Corp. traded as an ADR (NYSE:HXM) , continues to prosper. It was Homex that built my friend’s beach front property.